TAKING A COMPANY PUBLIC

How a SPAC Works: Promote, Trust and Redemptions

By Baruch Mackliff, the Capital Commander · PRBE Capital

Topic: Taking a company public, and what a public vehicle is for

A special purpose acquisition company is a listed company with no operations, no revenue and no product. It exists to hold cash and to go looking for a private business to merge with. When the merger closes, the private business is public. That is the entire idea, and the idea is not where the money is decided.

What decides the money sits in the mechanics: how the cash is held, what the sponsor is paid for assembling the vehicle, how long the clock runs, and what the public shareholders are permitted to do on the day the target is finally named. Almost every disappointing outcome in this market traces back to one of those, and almost every pitch deck skips all of them.

What the public actually buys at the offering

A SPAC raises money through a conventional public offering, but what it sells is a unit rather than a share. Market convention prices that unit at ten dollars and puts inside it one share of common stock plus a fraction of a warrant, commonly a half or a third, occasionally less when terms tighten in the sponsor's favour. After a short separation period the unit splits, and the share and the warrant trade under different symbols.

The cash goes into a trust account with a trustee and is invested in short-term government instruments. It is not working capital. The sponsor may not spend it on bankers, lawyers or diligence. It sits there until one of three things happens: a merger closes and the money is released to the combined company, a shareholder redeems and takes their portion back, or the deadline passes and the trust is liquidated to the public shareholders.

That structure is why a SPAC share behaves less like equity in a business and more like a short-dated claim on cash with an option stapled to it. Buying at or below the trust value and holding through a vote produces a claim on a known quantity of cash; the warrant is usually kept either way. Large funds understood that shape long before it was described publicly, and they bought units accordingly. That is not a scandal. It is the design working exactly as written.

The sponsor's promote, and who pays for it

The sponsor is the group that forms the SPAC, funds its start-up costs, carries the risk that no deal ever happens, and finds the target. It is compensated through founder shares, universally called the promote.

The convention is founder shares equal to twenty per cent of the post-offering share count, purchased for a nominal sum before the offering. The sponsor also buys private placement warrants or units at the time of the offering, and that money pays the underwriting and running costs so the trust can stay whole.

Two consequences follow, and they are the ones most often left out of the conversation.

• The promote is dilution, and everybody else pays it. A fifth of the equity was issued for almost nothing. Arithmetically, the cash standing behind each public share at the moment of the offering is therefore lower than the price paid for it, before a single expense is incurred. The public buys a claim on a trust that is spread across a share count larger than the one the public subscribed for.
• The sponsor's incentives are asymmetric in the extreme. If no deal closes, the founder shares are worthless and the sponsor loses its at-risk capital entirely. If any deal closes, however poor, those shares convert and are worth something. A sponsor approaching a deadline is therefore motivated to close, and any target sitting on the other side of the table should assume that is understood by both sides.

None of this makes a sponsor dishonest. It makes the incentive legible, which is more useful than assuming goodwill.

The clock, and what an extension costs

The charter and the trust agreement set a deadline to complete a business combination, conventionally somewhere between eighteen and twenty-four months from the offering, sometimes with extension options written in from the start. Miss it, and the vehicle must redeem the public shares out of the trust and wind up.

Extensions are possible, but they are rarely free. A charter amendment to extend normally triggers a redemption right of its own, so shareholders who do not want to wait take their cash out at the extension vote rather than at the deal vote. Sponsors often contribute additional money into the trust to buy each extension period.

The practical effect matters enormously to a target: by the time a late-stage SPAC reaches an actual transaction, a large part of its trust may already have walked out of the door at an earlier vote, long before anybody had the chance to evaluate the business being acquired. The headline trust figure in the original offering and the cash available at closing can be entirely different numbers.

The de-SPAC, step by step

Finding and closing a target is called the de-SPAC. The sequence:

• A letter of intent, then a merger agreement, negotiated the way any acquisition is negotiated, with a valuation for the target agreed between the sponsor and the target's owners.
• A registration statement or proxy statement filed with the Commission, containing the target's audited financial statements prepared to public-company standards, risk factors, management discussion and a full description of the transaction. This is the point at which a great many private businesses discover their books do not survive the transition to an audit conducted to the standard a public filing requires.
• Commission review and comment, which is iterative, and which is the most common source of delay in the whole exercise.
• A shareholder vote, which is also the moment the redemption right gets exercised.
• Closing, and the current report that follows. Within four business days of closing, the combined company files a current report containing essentially the information a Form 10 registration would carry: the complete description of the now-operating business, its financial statements and its risk factors.

Between signing and the vote, the target is valued publicly, disclosed publicly and picked apart publicly by people who have no relationship with it and no obligation to be generous. An owner unprepared for that finds the experience unpleasant, and occasionally it is fatal to the deal itself.

Redemption is the mechanism that decides the outcome

Here is the part that explains the headlines.

Public shareholders have the right to redeem their shares for a pro-rata share of the trust at the time of the vote, whether or not they vote in favour of the transaction. Voting yes and redeeming on the same day is entirely permitted. The right attaches to the share, not to the opinion.

So a deal can be approved overwhelmingly and still lose nearly all of its cash. Holders vote yes because a yes vote preserves the warrants and costs them nothing, then redeem because redemption returns the trust value, and the trust value is a known figure while the merged company's future share price is not.

In the last wave, redemption running at ninety per cent of the trust or more became ordinary rather than exceptional. A vehicle that advertised a large trust arrived at closing holding a small fraction of it. The sponsor still received its founder shares. The target still became a public company. The money, which was the reason the target agreed in the first place, largely did not arrive.

That is why so many newly merged companies begin public life undercapitalised, and why the share price so often falls immediately afterwards. The float is thin, the register is full of warrants and converting sponsor shares waiting to land on it, and the cash that was meant to fund the business plan is sitting in the redeeming holders' accounts.

What is supposed to fill the hole

Because redemption risk is now well understood, deals get structured to survive it.

• A PIPE. A private investment in public equity, committed by institutional investors alongside the merger agreement at a negotiated price. In many transactions the PIPE, not the trust, is the real source of the money. If the PIPE does not come together, the deal frequently does not either.
• A minimum cash condition. The target negotiates a floor: if cash at closing after redemptions falls below an agreed level, the target may walk away. Sponsors resist these, and targets that agree to go without one tend to learn why.
• Non-redemption agreements and backstops, in which specified holders agree not to redeem, sometimes in exchange for additional shares. That consideration is itself dilution, and it lands on whoever is still holding at the end.
• Promote forfeiture, where the sponsor surrenders part of the founder shares to make the economics work. It happens regularly, and a target with any leverage should raise it explicitly at the term-sheet stage rather than hope it comes up later.

Read in sequence, those items describe a market that has already priced the redemption problem in. A proposal that addresses none of them has not solved it. It has simply declined to mention it.

What the operating business is actually signing up for

On the day after closing, the combined company is a full reporting company. Audited financial statements on a public timetable. Quarterly reports. Current reports on short deadlines when something happens. Internal control over financial reporting, and management's assessment of it. A board with independent directors and a functioning audit committee. Insider reporting obligations for officers, directors and large holders. A transfer agent. An exchange's continued listing standards, if the shares are listed rather than merely quoted. And the recurring bill for every one of those.

A business that could not produce clean audited accounts as a private company does not acquire the ability to produce them by merging with a shell. The merger changes the reporting obligation, not the underlying bookkeeping.

Which leads to the point that matters more than any other. A listing is a tool that changes how capital is raised and how value is recognised. It is not a source of capital by itself. A SPAC merger does not make an unfundable business fundable. If a plan did not attract money on its merits as a private company, becoming public through a shell does not manufacture demand for it. What it reliably adds is disclosure obligations, expense, and a share price that publishes the market's opinion of the business every single day.

Reading a proposal, if one arrives

Ask for the current size of the trust and the current share count including founder shares and warrants. Ask for the deadline and how many extensions have already been taken. Ask what redemptions ran at any prior extension vote, because that figure is knowable and it predicts the next one. Ask whether a PIPE is committed and on what terms. Ask whether there is a minimum cash condition and where the floor sits. Ask what the promote is after any agreed forfeiture. Then ask the sponsor what the company does if cash at closing turns out to be a fraction of the trust, because for most of the last wave that is precisely what happened.

PRBE Capital works with owners on the question that sits before all of this: whether a public vehicle serves the plan at all, what an operating company must be able to produce before it is subjected to public reporting, and which route actually matches the capital being sought. The first conversation costs nothing and commits to nothing.

This is an explanation of how these structures are built, not legal, financial or investment advice. Market conventions, charter terms and the rules governing them change over time, and the version that governs a specific transaction is the one in force when it is signed, so confirm every current requirement with qualified counsel before relying on any of it.

Common questions

What is a SPAC and how does it actually work?

A SPAC is a listed company with no operations that raises cash in a public offering, holds that cash in a trust account, and then looks for a private business to merge with. When the merger closes, the private business becomes public and the trust is released to the combined company. The sponsor who assembled the vehicle is paid in founder shares rather than fees, and a deadline in the charter forces either a deal or a liquidation.

What is the sponsor's promote in a SPAC?

The promote is the block of founder shares the sponsor receives for forming the vehicle, conventionally about twenty per cent of the post-offering share count, bought for a nominal amount. It is compensation paid in dilution rather than cash, which means every other shareholder pays for it. It also creates a strong asymmetry: those shares are worthless if no deal closes and valuable if any deal closes, however weak.

What is the trust account and what can it be spent on?

The trust account holds the offering proceeds with a trustee, invested in short-term government instruments, and it cannot be touched for diligence, bankers or legal fees. It is released only when a business combination closes, paid out to a shareholder who exercises a redemption right, or returned to public shareholders if the deadline passes with no deal. That protection is what makes the shares behave like a short-dated claim on cash rather than ordinary equity.

What are SPAC redemption rights?

Every public shareholder may hand back their shares for a pro-rata portion of the trust at the time of the vote, and the right applies whether they vote for the deal or against it. Voting yes and redeeming on the same day is entirely permitted, because the right attaches to the share rather than to the opinion. This is the single most important mechanic in the structure and the one most often left out of a pitch.

Why do so many de-SPAC deals close with most of the trust redeemed?

Because redeeming returns a known amount of cash while the merged company's future share price is unknown, and because holders can approve the deal and still take their money out. In the last wave, redemptions of ninety per cent of the trust or more became ordinary rather than exceptional. The result is a company that is technically public but arrives undercapitalised, with a thin float and a register full of warrants and converting sponsor shares.

What happens if a SPAC does not find a target before its deadline?

The charter requires the vehicle to redeem the public shares out of the trust and wind up, returning the cash with accrued interest to the public shareholders. The sponsor's founder shares become worthless and its at-risk capital is lost. That outcome is why sponsors will pay into the trust to buy extension periods, and why each extension vote usually lets more shareholders cash out early.

Does merging with a SPAC raise money for my company?

Not by itself, and this is the most expensive misunderstanding in the market. The cash only arrives to the extent shareholders choose not to redeem, plus whatever a committed PIPE brings alongside it. A listing changes how capital is raised and recognised, but it does not make an unfundable business fundable, and it adds real reporting obligations and recurring expense from the first day.